Why Mutual Funds May Not Be The Best Way To Invest In The Market For Many Retirees

Mark Teruya
By Mark Teruya
Wednesday - November 08, 2006
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When you look at the facts, you have to wonder if mut u a l funds are really the best way to invest in the market.

Here are the facts: The average mutual fund money manager has been on the job only 6 years. (Source: Wall Street Journal, 6/20/2000)

The average mutual fund charges 1.54% annually in management fees, fees subtracted directly from your return. (Source: Morningstar 2004) (Money Mutual Funds take to manage your money is money you don’t keep.



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That’s okay if you’re really getting good management, but sometimes you don’t - read the next bullet point) (Another note: even no-load funds charge annual management fees, that’s how mutual funds make money.) the average mutual fund “turns over” 90% of it’s portfolio each year. (Source: Wall Street Journal 6/20/2000). In other words, if a fund owned 100 stocks right now, at the same time next year, it would own only 10 of the same stock. You may be saying, “that’s good, that’s what mutual funds are supposed to do, buy and sell stocks for a profit to make money and to earn their fees” - Here’s what can be the problem: some mutual funds buy and sell funds for a profit, but the profit is smaller than the profit you’d receive if they didn’t manage your money at all - read the next bullet point

When you study what returns growth mutual funds earned from 1970-1995, you find that 65% of all growth mutual funds didn’t beat the return of the standard and poor 500. (Source: John C. Bogle, Chairman Vanguard Companies, in a speech delivered in Atlanta, GA on 5/8/1996) The Standard & Poor 500 index, or S&P 500 as it’s known is probably the most commonly used market index to measure how the market is performing over all. The return of this index matches the return you’d receive if you just went out and bought these 500 stocks and held them, with ZERO MANAGEMENT. So, when mutual fund money managers want to see how they did, they’ll compare the return they generated to the return generated by the S&P 500.

BOTTOM LINE: As you’re planning for retirement, you need to ask yourself these questions:

“If my funds are not beating the market indexes, why should I keep paying management fees to the money managers that manage my fund when an unmanaged index return might be higher?”


“Since I can get the market index returns with zero management, does it makes sense to pay the professional management fees that most mutual funds charge?”

The truth is that a lot people could do better for themselves by simply investing in these market indexes with little or no management fees.

Many times, by simply fine tuning their investments, folks can put extra money, sometimes thousands of dollars in their pocket or investment account every year.

Keep in mind that when we’re talking about market returns, past performances do not guarantee future results.


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